Although life insurance proceeds are usually left directly to beneficiaries to spend as they like, this is not always an ideal solution. There are many advantages to this approach, including simplicity, quick payouts, privacy, avoiding probate fees and, in some cases, Will challenges and the policy-owner’s creditors. On the other hand, this might not be the right decision when you are looking for some of the benefits of a Trust Will (described elsewhere in more detail), such as more detailed direction as to how the money is to be used and what happens to the money if a beneficiary dies before you, protection of minors, disabled or the financially challenged, as well as large potential tax savings for heirs. Fortunately, it is possible to potentially combine some of the benefits of both approaches, depending on which of the options below you select.

One option is simply naming a Trustee on the insurance beneficiary designation to hold money in trust for a minor (as the Public Trustee would otherwise administer the money until the child reaches the age of majority), but this does not provide direction as to what happens to the money if the child dies before you or before becoming an adult. Moreover, the form does not allow you to provide any directions on how the money is to be spent or invested. In fact, the Trustee must pay out the remaining balance to the child the instant that he or she is no longer a minor to use any way he or she sees fit, which can be disastrous.

It is also possible to leave an insurance policy directly to your estate and take advantage of any Trusts set up in your Will. This does avoid the cost of a separate Trust document, but means paying probate fees, exposure to the deceased’s creditors, Will challenges, delay in receiving the funds and a loss of privacy.

You might also use a “life insurance beneficiary designation clause” in your Will.

This clause names the Trustee of these funds and stipulates that the money is to be held separately from estate assets, although it is to be distributed according to the terms of Trusts found in your Will. On the other hand, there is still debate whether the insurance funds would still be considered part of the estate and subject to probate fees and other issues mentioned previously. Some lawyers suggest that naming a different Trustee for the insurance proceeds and / or having different Trust terms for the insurance funds than for estate assets reduces this concern. In addition to the chance that the proceeds might ultimately still be considered part of your estate, another potential drawback is that you also automatically revoke your life insurance beneficiary designation clause each time you revoke your Will, which means having to add another insurance beneficiary clause to subsequent Wills unless you want the proceeds to become part of your estate. Moreover, this approach does not provide the simplicity or privacy of the approach discussed next.

Finally, another option is using a separate Trust document outside the Will. It is more common to send a copy of this document to the insurance company so it sends the money to the Trustee to look after the money for the beneficiaries, although it is also possible to simply name the Trustee as beneficiary on a standard insurance beneficiary form and forward that to the insurance company instead, although it is important that someone has the proper documentation to show that the Trustee isn’t entitled to keep the money for his or her own benefit. This approach requires paying to draft a separate Trust document, which costs more than adding an insurance beneficiary designation clause to a Will, but is generally regarded as the safest alternative.

Ultimately, you will need to consult with a lawyer to determine the best option for your situation and to draft any necessary documents. It is also imperative to provide copies of any documents that change the beneficiaries of a policy to the life insurance company.